An adjustable-rate loan gives buyers more leverage, but it’s risky if mortgage rates keep rising. Unlike the 2010s, though, there’s little risk to the U.S. economy.
NEW YORK – Shaken by the higher rates charged for a fixed-rate mortgage, more homebuyers are turning to the savings offered by an adjustable-rate mortgage (ARM), such as 2-1 buydowns, and interest-only mortgages.
ARMs can be a good deal before buyers get to their first adjustment, but after a pleasant introductory period can rise by hundreds of dollars each month.
In theory, the loans could also go down by hundreds of dollars each month if rates fall, but given inflation and the Fed’s actions, that’s highly unlikely.
If buyers underestimate interest-rate increases – or over overestimate the amount of household income they expect to be making – they could end up in a perilous financial situation when their introductory period ends and their monthly payments escalate, according to consumer advocates and other industry observers.
“The scary thing about this market is that people are trying to stretch to get in the door, and that can put individuals in a very difficult spot,” says National Consumer Law Center staff attorney Sarah Mancini. She and others see the growth of riskier mortgages as especially worrying amid economic uncertainty and expectations of mounting unemployment, continued interest rate appreciation and shrinking home sales.
The Mortgage Bankers Association estimates that adjustable-rate mortgages currently account for nearly 12% of all mortgages, up from about 3% a year ago.
However, the risk is largely limited to the homebuyers taking out a loan – it’s not considered a risk to the U.S. economy as ARMs were during the Great Recession. Experts believe regulatory safeguards implemented after the 2008 financial crisis should prevent rampant defaults.
“There’s not a whole lot of room to do some of the risky stuff that happened in 2006, where you could sell it off to some investor and they wouldn’t even know what they were buying,” says the Consumer Financial Protection Bureau’s Mark McArdle.
Source: NBC News (10/15/22) Pettypiece, Shannon
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